Special Dividend: CME Group (CME)

The CME Group is comprised of the Chicago Mercantile Exchange, COMEX, Chicago Board of Trade, and the New York Mercantile Exchange. CME is the largest group of derivatives exchanges in futures contracts and options. Basically, really cool shit trades on their exchanges that money managers would be interested in using to hedge their portfolios. Volumes have been increasing consistently year over year on these exchanges.

Today, I wanted to take a look at the special dividend that has become a pretty regular occurrence from the CME. Yes, they also have a regular quarterly dividend that has impressively grown since they’ve become publicly traded, but look for that write up coming in the 1st quarter of 2017, when I expect their next increase. CME announced a special dividend of $3.25 per share payable in January. This is 12% higher than last years special dividend of $2.90. The special dividend comes as no surprise to me. The hard part was coming up with an estimate of what to expect. Honestly, I would have been happy with any dollar amount paid as a special dividend.

Special dividends are one off dividends that are not frequently paid out by companies. You may get a special dividend once, and never again. Something is real special with CME though. Since being publicly traded and paying dividends back in 2003, CME has paid 7 special dividends in 6 of 14 years. A few years back the company actually called the special dividend an annual variable dividend policy (separate from its quarterly dividend). The board looks back at the year, reviews the cash sitting in the piggy bank, and returns excess cash to shareholders (taking into account any future needs for business and possible acquisitions). This is a very generous policy (imagine if APPL did something like this). In all of my years of investing, I’ve only had 2 companies pay multiple special dividends, CBOE and CME.

Again, we are just looking at the special dividend for CME. 7 special dividends paid out in 6 years of their 14 year publicly traded history. The current dividend yield on CME is 1.96%, this does not factor in the special dividend. If we add in the $3.25 special with the regular $0.60 quarterly, we get a total yield of 4.60% (3.25+(0.6*4)/122.66).

With CME, we have the potential for a generous special dividend (extra disposable income) with a growing quarterly dividend. But what about capital appreciation?

CME vs S&P500

Going back to 2003, when CME went public, it’s been a phenomenal growth story. It took a hit back in 2008, but has made back most of those loses. I have a price target of $150 on the stock. Again, it’s a specialty exchange group. Volumes are continually increasing and money managers look for ways to reduce volatility. These guys are the exchanges those products trade on. With CME, you have a steady growing dividend, potential special dividends, and cap appreciation. It’s not even a fair comparison to the S&P500.

Company Info:

Market Cap: $41.62Billion

PE Ratio: 28

Dividend Yield: 1.96%

Beta: 0.70

Profit Margin: 41%

Total Cash: $1.5 Billion

Total Debt: $2.23 Billion

Payout Ratio: 53.61%

I love that profit margin. Since CME is providing the market for derivatives, they can increase their fees and there is nothing anyone can really do about it. Payout ratio is also healthy.

Conclusion:

CME is one of my favorite stocks in my portfolio and currently a top 5 holding. I don’t have plans to sell anytime soon. It has little analyst coverage I’ve actually written about them buying out CBOE, their neighbor down the street. It would just make too much sense. Unfortunately, I’ve been holding onto that idea for a few years, since back when CBOE had a market cap of about $2billion (currently $6billion). CBOE is also looking at growing through some M&A as well with a recent offer to purchase BATS, and CBOE has also seen some nice appreciation on top of everything. So if CME was to make an offer for CBOE right now, it would be a lot more expensive. Also, with the big special dividend, it doesn’t look like CME is looking to make my CBOE purchase dream come true. I’m actually long both CME and CBOE. I was previously long NMX and CBOT, both of which were purchased by CME.